Abstract
Participation in the exchange rate mechanism ERM II (one of the Maastricht criteria – exchange rate stability) is compatible with certain exchange rate regimes only. The aim of this paper is to find arguments for choosing one of these regimes. The starting point is the current strategy of the euro introduction in the Czech Republic, and the expressed concerns about the risks associated with fixing of the exchange rate. The used method is analysis of data on the currency participation in ERM II and searching for analogies of Czech koruna. The analysis consists of the identification of exchange rate regimes used before and after ERM II so that to determine the duration of ERM II involvement. Fixing of the exchange rate in the regime peg with a band of oscillation of 15% in both directions is the working hypothesis. Criteria of the so-called normal fluctuations margins and the so-called severe tension are also discussed. Development trend of the CZK/EUR exchange rate is examined. The outcome of the research is finding the risks associated with this exchange rate regime. It is the risk of a narrow fluctuation band (2.25%) in depreciation direction and the risk in the form of foreign exchange intervention or interest rate differential at excessive appreciation of the exchange rate.
Highlights
The Maastricht convergence criteria include, inter alia, the exchange rate stability criterion
The condition for introduction of the euro is at least a two-year participation in the exchange rate mechanism ERM II
Participation in ERM II means to apply some of the fixed exchange rate regimes
Summary
The Maastricht convergence criteria include, inter alia, the exchange rate stability criterion (or the exchange rate convergence criterion). To comply with this criterion, the socalled “normal fluctuation margin”, without the so-called “severe tension”, has to be respected without devaluing the central parity. There might be other reasons behind the plan to have Czech koruna be involved in ERM II only for a necessary period of time To determine these reasons, useful would be an analysis of the past experience of the new EU Member States that have already joined the euro area. The fourth part (data and methodology) deals with the possible exchange rate regimes compatible with the participation in ERM II as well as the alternative views on the euro adoption in the Czech Republic. The fifth part discusses arguments for the selection of a specific exchange rate regime for future participation of Czech koruna in ERM II. The sixth part (Results) concerns the identification of risks associated with the exchange rate regime
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